The other side of the mortgage story

I was talking with a friend who works in the home mortgage field, and brought up the case of Susan and Michael Walker, which I'd seen on ABC World News. They're a family desperate to keep their house, which they couldn't pay for after their adjustable rate mortgage kicked in. I told my friend I felt really sorry for the Walkers, and couldn't figure out why the heartless mortgage company couldn't reduce their mortgage down from 14 percent to something that would let them stay in their house.

My friend, who also saw the story responded:

I tell you what's absolutely maddening about this whole sub-prime mortgage crisis. It's the issue of entitlement. I'm sorry, but this couple had no business buying a $172,000 home on less than $80,000/yr. combined income. Nor did some loan originator have any business giving them a 100% (no money down) Adjustable Rate Mortgage (ARM) at a 9% introductory rate. Are you kidding me? But because they wanted the house, and the mortgage loan originator wanted the hefty fee that goes with creating such a mortgage, the deal is done. And then this piece-of-crap debt is bought and pooled together with other piece-of-crap debt by companies like mine, and sold as Mortgage-Backed Securities (MBS) on Wall Street to pension fund managers, insurance fund managers, and the like. "Hey," the big mortgage companies say to themselves, "we can make big money by purchasing these crap loans, convert them to securities, mark them up, and then sell them to investors. We'll take our cut and still there's enough $$$ to go around! Let's do it!" And the pension fund managers who invest in these MBSs think to themselves, "Hey, it's a good investment! It's backed by good collateral - mortgages - right? That's a pretty safe stream of good, steady income for us. Let's get while the gettin's good!"

And that's when the bottom falls out of the whole. damn. thing.

People like Susan and Michael Walker start to not make their payments, because they did not understand, before signing on the dotted line, what happens to a mortgage payment when the interest rate goes from 9% to 14%. They were probably barely making ends meet when their rate was at 9%. It's unbelievable to me that anyone would have signed on the dotted line when faced with this very real possibility. They either didn't understand what could happen, or they just didn't care. I guarantee you what the originator told them. "Hey, don't worry about it. Property values are going up. You'll grow equity that way. And besides, rates will probably go down in a few years, and then you can refinance at a lower rate. You'll be ok."

So ABC News calls the company that holds their mortgage and says, in effect, "What gives? Why won't you help these poor people? They're just trying to live the American dream." What could any company do in the face of that? Refuse to modify the loan on principle that they shouldn't have entered into the agreement in the first place? Of course the loan got modified, like ABC reported. Makes things affordable for the Walker family, that's for sure.

The thing is, everyone in this cycle is implicated in this mess. It's greed, and entitlement. I want what I want and I want it now - from the borrowers who have no business borrowing, to originators who have no business lending the money, to the mortgage companies who have no business buying the crap loans, to the investors on Wall Street who have no business purchasing these Mortgage-Backed Securities.

It's all about to come crashing down, and hard.

What's "all"? I asked my friend, thinking he meant the home mortgage biz. He said, "The whole global financial system." It's built on a house of sand, he explained. People expecting things they can't afford, and other people enabling them. Everybody wanting to get rich now, and letting the future worry about itself. This is where the culture has directed the market, and now the bill is about to come due. We've had a massive party for a long time, every one of us. Now comes daylight, and the hangover, and the mess.